Moody's: The French Market Shows that Bank Disintermediation is a Viable Way Forward for European SME CLOs

In the context of increasing bank disintermediation in Europe, GIAC Gestion SAS' recent cash flow CLO transaction is an example of a viable way forward for European SME CLOs, says Moody's Investors Service in a new report published today.

"FCT GIAC Obligations Long Terme II (GIAC OLT II) illustrates how securitisation can finance SMEs and mid-caps without the direct involvement of an originating bank and its unique features ensure the alignment of interests between the manager, investors and obligors," observes Monica Curti, a Moody's Vice President -- Senior Analyst and author of the report. 

The securitisation has unique features compared with standardised European collateralised loan obligations (CLOs) and granular SME securitisations. It uses its low cost of funding to provide cheaper financing to SMEs and mid-caps while providing strong protection against adverse portfolio selection.

Compared to European BSL CLOs 2.0. the structure has additional challenges, relating to the assets securitised and structural features such as the long two-year ramp-up period.

"GIAC Gestion's transactions have performed in line with expectations, despite the recession in France" Ms Curti notes. Defaults indeed remained limited during the credit crunch and often resulted from the fact that French banks decided to cut financing to companies (i.e., on banking loans originated outside of GIAC's transactions). This shows that SME financing remains linked to the banking system, albeit indirectly.

The new report: "The French Market Shows That Bank Disintermediation Is a Viable Way Forward for European SME CLOs," is available on www.moodys.com.

GIAC OLT II is a securitisation of bonds from French small and medium-sized enterprises (SMEs) and from companies with higher market capitalisation (mid-caps).